League City (located south of Houston), was insured through the Texas Windstorm Insurance Association (“TWIA”) when Hurricane Ike struck the Houston area in 2008. The policy covered numerous buildings and structures, all separately listed with their own corresponding deductibles. The policy required League City to provide “prompt written notice” of a loss, including “a description of the property involved.”[1] TWIA was required to “acknowledge receipt of the notice of loss promptly, to begin an investigation, to request additional information from the insured as needed, and to inform the insured whether the claim would be paid, had been denied, or required more information to enable a decision to be made.”

League City sent TWIA a timely “First Notice of Loss” form that described the loss and damage simply as “Wind Damage to Various Locations.” TWIA acknowledged receipt of League City’s notice and assigned an outside adjuster, Gauthier, to investigate the claim. Gauthier created a spreadsheet of all structures covered by the policy generally. League City’s representatives agreed to use the spreadsheet as a reference for their claimed damages. League City submitted receipts and contractor repair estimates for known damages at that time.

Gauthier’s site inspections of known damages revealed that City Hall sustained significant damage, but most of the other wind damage was minor. In November 2008, Gauthier told TWIA that League City was still assessing damage. By May 2009, League City sent Gauthier a completed version of the spreadsheet, repair estimates, and contractor invoices. TWIA paid League City $200,000 as an advance on City Hall repairs in June 2009. A few months later, TWIA paid League City $304,747.40 for City Hall and some other properties. Approximately one month after that, Gauthier sent League City a letter stating that TWIA instructed him to close the claim but that “a supplemental claim could be filed ‘once repairs are completed, and all claim documentation is submitted to TWIA.’” In May 2010, TWIA paid League City $4,026.95 for fire station repair expenses.

TWIA sent League City a letter with a final adjustment on the City Hall claim in October 2011. At no time did TWIA send League City a denial of coverage letter on the known claims. League City did not request any additional payments until it sued TWIA for contractual and extra-contractual claims. TWIA notified League City’s attorneys that it had not received any pre-suit notice of the additional damage now being claimed.[2] Receiving no response, TWIA answered the suit and made an appraisal demand. After a final appraisal award issued in the amount of $3,449,755.37 (without the approval of TWIA’s appraiser), the matter proceeded to a jury trial. League City argued that Gauthier failed to properly adjust the claim as proven by the appraisal award. The jury found in favor of League City on its contractual and extra-contractual claims. TWIA argued the insurance policy required prompt written notice of loss including a description of the property involved. TWIA asserted that League City was invited to submit supplemental claims when additional damage was identified, all known damages had been paid, League City sued without providing notice of any additional damage, and TWIA was never given an opportunity to pay any additional claims raised in the lawsuit. The jury found in favor of TWIA on its affirmative defense of lack of notice. The jury also found TWIA was prejudiced by the lack of prompt written notice. The trial court entered a take-nothing judgment against League City upon TWIA’s motion for JNOV.

On appeal, the Court addressed the jury’s divergent answers by pointing out that “an affirmative defense does not negate the plaintiff’s factual basis for imposing liability; rather it supplies an independent reason why, if proven by the defendant, the plaintiff cannot recover.” Zorrilla v. Aypco Constr. II, LLC, 469 S.W.3d 143, 155-56 (Tex. 2015). Although the Court reiterated that an insurer bears the burden to show prejudice arising from the insured’s failure to provide prompt notice, it drew a distinction between notice that was merely late, and that which was wholly lacking. While League City’s initial notice was deemed prompt, it did not include a description of the property involved. The Court recognized that “TWIA did not know if League City was expecting further investigation, adjustment, or payment or if it agreed with the adjustment and payments that already had been made.” The appraisal was not considered a waiver on TWIA’s part since TWIA had no knowledge of League City’s failure to provide notice on any additional damage claims. The Court agreed League City’s failure to comply with the prompt notice requirement in full caused TWIA prejudice, resolving the issue of coverage in TWIA’s favor. As a result, the Court further affirmed that League City’s extra-contractual claims could not survive.

NOTE: Many of the wind/hailstorm lawsuits we are defending today involve claims where the insurer had no notice of additional damage until suit is filed. This new opinion may prove useful where a claim is accepted and paid, a sworn and signed proof of loss is never provided, the insured has no communication with the insurer, and then suit is filed claiming “additional damage” months after the original claim was closed.

[1] League City was also required to “keep an accurate record of repair expenses” and to provide access to the damaged property and copies of pertinent records upon request. While the jury found the repair-records defense applied to most but not all disputed structures, the Court’s opinion is focused on the dispositive “failure to provide notice” issues. See League City v. Texas Windstorm Insurance Association, 2017 WL 405816 at fn. 3.

[2] It should be noted that the insurance policy also provided that “legal action” against TWIA may not be “sustainable” unless League City complied “with all the terms of the policy.”